Zenith Bank plc Summary We initiate coverage of Zenith Bank plc (Zenith Bank) with a HOLD recommendation based on an estimated fair value of NGN14.63, 12-month cum-div target price of NGN17.27. Zenith Bank is the second largest bank in Nigeria by balance sheet size, with total assets worth NGN1.895 trillion as at December 31, 2010. Between 2006 and 2010, the bank grew its assets at a CAGR of 32%. Zenith Bank is known for its aggressive growth of network and market share, while keeping its focus on quality and a conservative approach towards creating (loan) assets. While seeking to maintain its position as a leading financial service provider in Nigeria, the bank has proposed a cautious approach towards global expansion. Zenith Bank was a net beneficiary of the result of the stress test of Nigerian banks carried out by the Central Bank of Nigeria in 2009. Going forward, we expect Zenith Bank to benefit significantly from the strong economic growth expected in the country over the next few years, which will be driven by investments in critical infrastructure within a stable polity. However, Zenith Bank is still exposed to varying risks as a result of global and local macro-economic concerns, and ongoing reforms in the financial services sector. Although the potential emergence of foreign banks (especially from South Africa) could be a threat, the large population of the unbanked, its strong niche position, in addition to strengthened risk management puts Zenith Bank in a good position to weather the storm. Zenith Bank’s relative competiveness stands it in good stead to take advantage of business opportunities as they arise. Report Date 28 June 2011 FAIR VALUE 14.63 12-month cum-div target price 17.27 Current price 14.80 Total Expected Returns 16.72% Recommendation HOLD 52 week price range (NGN) 11.21 – 16.70 Market Cap (NGN’billion) 465 Common Shares Outstanding (million) 31,396 Fiscal Year End December Auditors KPMG Contact: Ayo-Oluwa Aderibigbe [email protected]+234 (1) 4618490 Oluwatosin Sanusi [email protected]+234 (1) 4618490 Babajide Fadahunsi [email protected]+234 (1) 4618490 [email protected]www.wstcfinancialservices.com IMPORTANT DISCLOSURES ARE INCLUDED AT THE END OF THIS REPORT INITIATING COVERAGE Nigeria Equity Research 52 week share price movement; rebased to 100 Source: Nigerian Stock Exchange, WSTC Research Zenith Bank plc 2006 2007 2008 2009 2010 2011e 2012e 2013e 2014e 2015e Adj. EPS 0.38 0.58 1.64 0.65 1.19 1.60 2.13 2.61 3.10 3.70 Adj. DPS 0.21 0.30 0.91 0.36 0.85 1.00 1.35 1.69 2.04 2.43 Adj. NAPS 2.28 3.46 7.37 10.90 11.17 11.70 12.20 13.06 14.06 15.23 P/E 39.3 25.3 9.0 22.7 12.4 9.3 7.0 5.7 4.8 4.0 P/Bk 6.5 4.3 2.0 1.4 1.3 1.3 1.2 1.1 1.1 1.0 ROA 2% 2% 4% 1% 2% 2% 3% 3% 3% 3% ROE 17% 17% 22% 6% 11% 14% 18% 20% 22% 24% Source: Company Reports, WSTC Estimates *P/E, P/Bk based on current price of NGN14.80 0 20 40 60 80 100 120 140 NSE ASI Zenith Bank
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Transcript
Zenith Bank plc
Summary
We initiate coverage of Zenith Bank plc (Zenith Bank) with a HOLD recommendation
based on an estimated fair value of NGN14.63, 12-month cum-div target price of
NGN17.27.
Zenith Bank is the second largest bank in Nigeria by balance sheet size,
with total assets worth NGN1.895 trillion as at December 31, 2010. Between
2006 and 2010, the bank grew its assets at a CAGR of 32%.
Zenith Bank is known for its aggressive growth of network and market
share, while keeping its focus on quality and a conservative approach
towards creating (loan) assets. While seeking to maintain its position as a
leading financial service provider in Nigeria, the bank has proposed a
cautious approach towards global expansion.
Zenith Bank was a net beneficiary of the result of the stress test of Nigerian
banks carried out by the Central Bank of Nigeria in 2009. Going forward, we
expect Zenith Bank to benefit significantly from the strong economic growth
expected in the country over the next few years, which will be driven by
investments in critical infrastructure within a stable polity.
However, Zenith Bank is still exposed to varying risks as a result of global
and local macro-economic concerns, and ongoing reforms in the financial
services sector. Although the potential emergence of foreign banks
(especially from South Africa) could be a threat, the large population of the
unbanked, its strong niche position, in addition to strengthened risk
management puts Zenith Bank in a good position to weather the storm.
Zenith Bank’s relative competiveness stands it in good stead to take
advantage of business opportunities as they arise.
Gross earnings Operating income Operating profit margin
Zenith Bank plc Equity Research June 2011
14
W S T C
among others. This expense line gradually declined from a high of 61% in
FY2006 to a low of 48% in FY2009, but then increased to 53% in FY2010.
Among aggregated operating expenses, staff costs rose the most at a CAGR of
37%, which explains why its proportion in the total operating cost structure
increased from 29% in FY2006 to 40% in FY2009. The 9% jump in staff costs
from FY2007 to FY2008 can be explained by the competition in the labour
market for the best brains to drive the bank’s post consolidation strategy, which
therefore led to increased staff remuneration. The rise in staff costs is however
justified by the resilience the bank showed in the face of the crisis that engulfed
the industry.
Depreciation expense also grew strongly over the historical period, at a CAGR of
39%. The previous five years saw a rapid expansion of branch and business
outlet network, thus there was significant investment in assets - properties,
computer software and hardware - to support the growth.
Zenith Bank’s operating expense (OPEX) as a proportion of gross earnings
averaged 48% between FY2006 and FY2010, while cost-to-income ratio
averaged 70% over the same period. Between FY2006 and FY2010, Zenith Bank
gradually reduced its operating expense as a proportion of gross earnings from
its height of 56% in FY2006 to 41% in FY2009, because the denominator, that is,
gross earnings grew at a faster rate than the numerator, operating expense. The
reverse was the case in FY2010 when gross earnings declined faster than
9,614 14,650 33,942
45,443 34,185
3,280 4,793
9,026
13,655
12,162
19,830
28,887
44,594
54,190
51,422
-
20,000
40,000
60,000
80,000
100,000
120,000
2006 2007 2008 2009 2010
Staff salaries and allowancesDepreciationOther operating expenses
29% 30% 39% 40% 35%
10% 10%10% 12%
12%
61% 60%51% 48% 53%
0%
20%
40%
60%
80%
100%
2006 2007 2008 2009 2010
Staff salaries and allowances
Depreciation
Other operating expenses
Cost structure (NGN’million): 2006 to 2010
Source: Company reports, WSTC Estimates Source: Company reports, WSTC Estimates
Cost structure (contribution): 2006 to 2010
Zenith Bank plc Equity Research June 2011
15
W S T C
operating expense, thus recording a 10% year-on-year growth in the
OPEX/Gross earnings ratio.
In our analysis, we projected the operating expense as a proportion of gross
earnings to average 42% between FY2011 and FY2015; about 6% lower than
historical average of 48%. On the other hand, the cost-to-income ratio is also
projected to shed about 10% off the historical average, therefore averaging 60%.
The arguments for lower costs are premised on the costs savings expected from
initiatives by CBN to ensure banks reduce operating costs, coupled with the
relative lower interest expense (compared to the boom era) expected over the
next five years.
As at December 2010, peer analysis shows that Zenith Bank’s cost-to-income
ratio of 69% was marginally below peer average of 71%. GTBank had the lowest
cost-to-income ratio compared to industry peers, while UBA had the highest.
0%
20%
40%
60%
80%
OPEX/ Gross earnings Cost to income ratio
Source: Company reports, WSTC Estimates
Source: Company reports, WSTC Estimates
Cost ratios: 2006 to 2014e
73%
61%
82%
69%
71%
First Bank GTB UBA Zenith Bank
Cost to Income Ratio
Peer comparison of Cost to Income ratio: December 2010
Zenith Bank plc Equity Research June 2011
16
W S T C
Valuation Based on our valuation approach we estimate that Zenith Bank should be valued
at a fair price of NGN14.63, a 1.13% discount to the current share price
(NGN14.80). At NGN14.63, we value Zenith Bank at 1.24x 2011e book, P/E of
9.16x, Earnings Yield of 10.92% and Dividend Yield of 6.83%. To derive the
valuation of Zenith Bank we used discounted cash flow valuation models.
Assumptions
We estimated the discount rate by computing a nominal risk-free rate based on
the 10-year U.S. government bond yield1. The projected difference in U.S. and
Nigeria inflation was added to develop Nigeria nominal risk-free rate. Then using
the CAPM model, we estimated the cost of equity (discount rate) as follows:
Estimated cost of equity ranges from 20.80% to 17.54%. Cost of equity for 2011e
was derived from a risk free rate of 11.82%, equity risk premium of 6% and two-
year beta of 1.50. Beta was modified downwards to 1.33 (adjusted beta) in year
2015e, as the beta value in a future period usually moves closer to the mean
value of 1.0 (the beta of an average-systematic-risk security). Sustainable growth
rate was estimated as 6% (economic growth rate in year 2015e).
To derive the valuation of Zenith Bank we used the following absolute valuation
methods.
Five-year Dividend Discount Model (DDM), and
1 This method of building up nominal risk free rate was adopted due to the relative illiquidity of
certain Nigerian government bonds as compared to more developed markets, and the unusual current scenario whereby blue chip financial institutions and companies are able to borrow at lower rates than the government.
Zenith Bank cost of equity
2011 2012 2013 2014 2015
10-year U.S. bond yield A 2.91% 2.91% 2.91% 2.91% 2.91%
U.S. Inflation rate B 2.17% 1.61% 1.40% 1.66% 1.86%
Nigeria inflation rate, average consumer prices C 11.09% 9.45% 8.50% 8.50% 8.50%
Difference betweeen Nigeria inflation rate and U.S.
Total Liabilities 1,440,383 1,321,910 1,531,466 1,790,341 2,115,684 2,450,956 2,812,627 3,206,715
Net Assets 346,617 337,793 363,561 370,882 395,339 424,548 458,273 498,123
Source: Company Reports and WSTC Estimates
Zenith Bank plc Equity Research June 2011
22
W S T C
Disclaimer & Disclosures
The value of any investment is subject to fluctuations, i.e. may rise and fall. Past
performance is no guide to the future. The rate of exchange between currencies
may cause the value of investment to increase or decrease. Hence investors may
not get back the full value of their original investment.
This document is not an offer to buy or sell any security. This document does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. The appropriateness of a particular investment will depend on an investor’s individual circumstances and objectives. The investments and shares referred to in this document may not be suitable for all investors. This document is based on information WSTC Financial Services Limited (WSTC) received from publicly available reports and industry sources. WSTC may not have verified all of this information with third parties. Neither WSTC nor its advisors, shareholders, directors or employees can guarantee the accuracy, reasonableness or completeness of the information received from any sources consulted for this publication, and neither WSTC nor its advisors, shareholders, directors or employees accepts any liability whatsoever (in negligence or otherwise) for any loss howsoever arising from any use of this document or its contents or otherwise arising in connection with this document. This document is not to be relied upon and should not be a substitute for the exercise of independent judgment. This document includes certain statements, estimates and projections with respect to the anticipated future performance of securities listed on the Nigerian Stock Exchange and as to the market for these shares. Such statements, estimates and projections are based on information that we consider reliable and may reflect various assumptions made concerning anticipated economic developments, which have not been independently verified and may or may not prove correct. No representation or warranty is made as to the accuracy of such statements, estimates and projections or as to their appropriateness for the purpose intended and it should not be relied upon as such. Opinions expressed are current opinions as of the date appearing on this material only and may change without notice. Other third parties may have issued other reports that are inconsistent with, and reach different conclusions from, the information presented in this report. Those reports reflect the different assumptions, views and analytical methods of the analysts who prepared them.
Intrinsic Value Estimate
We estimate stock’s fair value by computing a weighted average of projected prices derived from intrinsic valuation methodologies. The choice of valuation methodology (ies) usually depends on the firm’s peculiar business model and what in the opinion of our analyst is considered as a key driver of the stock’s value from a firm specific as well as an industry perspective.
BUY: Estimated total return of the stock is above the current market price by at
least 20%.
HOLD: Estimated total return of the stock is between -10% and +20% from the
current market price.
SELL: Estimated total return of the stock is more than 10% below the current
market price.
Zenith Bank plc Equity Research June 2011
23
W S T C
WSTC Financial Services Limited (WSTC) is a Dealing Member of the Nigerian Stock Exchange (NSE) and is registered with the Securities & Exchange Commission (SEC) to conduct Financial Advisory, Fund/Portfolio Management, and Brokerage & Dealing in Nigeria. Therefore, we may deal in any securities listed on the NSE. This document is for information purposes only and for private circulation. No portion of this document may be reprinted, sold or redistributed without the written consent of WSTC. Additional information on recommended securities/instruments is available on request.
WSTC Financial Services Limited registered office is at 2 Maitama Sule Street, South West, Ikoyi, Lagos, Nigeria. Phone: +234(1)4618490, 4619989